June 10 (Bloomberg) -- On June 5, the British paper the
Observer ran a letter from 52 economists begging Prime Minister
David Cameron and Chancellor of the Exchequer George Osborne to
rethink their radical plan to lower government spending.

“Recent economic figures have shown that the government
urgently needs to adopt a Plan B,” said the letter. Then came a
rare bit of good news for the Prime Minister: an International
Monetary Fund report urging Cameron and Osborne to stick to
their plan. “Strong fiscal consolidation,” wrote the IMF,
“remains essential to achieve a more sustainable budgetary
position.”

The arguments over Cameron’s plan are getting heated as the
Conservative-Liberal Democrat government presses on with the
biggest budget squeeze since World War II, Bloomberg
Businessweek reports in its June 13 edition.

The government envisions about 80 billion pounds ($131
billion) of spending cuts plus 30 billion pounds of tax
increases over the next four years. Last year, when the cuts
began, was the easiest to bear. Some 6 billion pounds in
efficiencies were realized by the government in its various
departments.

This year the measures intensify. Britons have already felt
the pinch of a sales tax boost to 20 percent from 17.5 percent,
which the Office for National Statistics says has added three-quarters of a point to the inflation rate, now at 4.5 percent.

Job Cuts

A two-year pay freeze for public-sector employees started
in April, and cuts on welfare spending, including a three-year
freeze in child benefit payments, are under way. A total of
310,000 government-funded jobs are to be wiped out by 2015;
about 20,000 of those will be gone by the end of this year.

As the budget cuts unfolded, Sally Wheatman figured her
days as a communications officer for the local government in
Manchester, 163 miles north of the capital, were numbered. She
volunteered to be laid off in April, and started a public-relations company with her payout.

While Wheatman said she’s “optimistic” about her
prospects, she thinks “very carefully” before making big
purchases, and all around her she sees people reflecting “long
and hard” about their spending.

“I don’t get the sense that there’s a light at the end of
the tunnel,” said Wheatman, 45. “When we saw how severe the
cuts were, it started to dawn on us that things were going to
change.”

Income Squeeze

There are already 2.5 million Britons out of work. As of
March, the unemployment rate had held above 7.6 percent for 22
months. The possibility of a worsening job market is weighing on
consumers, who are already seeing their incomes squeezed by
rising prices for everything from food to car insurance.

VocaLink, which processes 90 percent of British salaries
paid directly to bank accounts, says annual wage growth in the
three months through May was 1.8 percent, less than half the
inflation rate.

“Income isn’t keeping pace with inflation, which is making
people nervous,” said Nick Moon, managing director of GfK NOP,
which conducts consumer confidence surveys. “People aren’t
going to be rushing out to spend.”

IMF Forecast

If consumers scale back spending, they could curb the
recovery and deprive the Treasury of the tax receipts it needs
to get the deficit under control. As it is, the economy
stagnated over the last two quarters. The IMF lowered its 2011
growth forecast for Britain to 1.5 percent this week from a 1.7
percent projection in April.

Adding to consumers’ concern is the possibility of an
interest-rate increase by the Bank of England.

“Consumer-spending growth is going to be sluggish at
best,” said John Bason, finance director of London-based
Associated British Foods, which owns the Primark chain of
discount clothing stores. “If the authorities were to start
tightening interest rates, that has to be negative for the U.K.
consumer.”

The Bank of England left the key interest rate at a record-low 0.5 percent today. It’s been at that level for more than two
years.

“They’re frightened that weak demand growth isn’t just a
soft patch but something more sustained,” said Richard Barwell,
an economist at Royal Bank of Scotland Group Plc in London and a
former central bank official. “It’s become a really big deal.”

Inflation Threat

Nevertheless, the central bank also has to check
accelerating inflation, caused by a weak pound that makes
imports more expensive, commodity prices, and the increased
sales tax. Andrew Sentance, who stepped down from the Monetary
Policy Committee on May 31, has been campaigning to increase the
benchmark rate to control inflation. Martin Weale, another
committee member, and Spencer Dale, the bank’s chief economist,
both sided with Sentance this year.

Cameron and Osborne have said they’re counting on the
central bank to keep policy loose as they push government
spending down to 40 percent of gross domestic product from 47
percent. Their plan calls for six consecutive years of spending
cuts, a feat that eluded even former Tory Prime Minister
Margaret Thatcher.

Deficit Projections

The government’s Office for Budget Responsibility forecasts
that the deficit, which reached a record 11 percent of GDP in
the aftermath of the recession, will narrow to 7.9 percent of
GDP by March 2012.

So far, though, the efforts of Cameron and Osborne have not
gained traction. Britain posted a 10 billion-pound budget
deficit in April, the largest for the month since at least 1993,
as tax income fell and spending rose.

That’s keeping pressure on Osborne, who only has to look
1,500 miles east to see how Greece is being punished by the bond
market because of the perception that it’s wavering in its
budget commitments.

“It’s very possible that U.K. growth will disappoint and
tax revenue may be less than forecast and they may miss their
fiscal targets,” said David Tinsley, an economist at National
Australia Bank in London and a former central bank official.
“The market will take a harsher view on signs they aren’t
committed to meeting the cuts.”

Labor unions have voiced opposition to the cuts. The Public
& Commercial Services Union, the largest civil service trade
union, which represents about 300,000 workers, is balloting its
members on a possible strike to protest the job cuts.

At a June 6 conference of the GMB, another major public-sector union, Business Secretary Vince Cable was heckled when he
raised the possibility of government action to curtail strikes.

“Confidence is quite easy to lose but hard to get back,”
GfK’s Moon said. For now, “people see themselves getting
poorer.”